Top 5 uses for your home equity

Top 5 uses for your equity

What’s the point of all that home equity if you’re not going to use any of it? That’s what Australians around the country are probably asking themselves. And when you consider the fact that, as the Australian Bureau of Statistics reported at the end of 2011, increase in equity was responsible for around a third of the 30 percent rise in household wealth during 2003-09, it’s not hard to see why. 

In fact, it seems more and more Australians are refinancing their home loans to make use of their gains, if a recent IBISWorld release is anything to go by. 

“Rising house prices have enabled many mortgage holders to refinance and release more of the equity in their homes,” said IBISWorld Industry Analyst Andrei Ivanov in a January 6 release. 

“This has encouraged households to spend on one-off big-ticket items, such as new cars, despite broader concerns about incomes and cashflow.”

Are you one of these equity-loaded Australians? If so, maybe it’s time you thought about spending that hard-earned gain. Here are a few options. 

Purchase a car

As the IBISWorld release indicates, this is already an option increasing numbers of Australians are turning to. Between 2009 and 2014, the total number of new cars sold increased from 916,050 to 1,122,100, with the average financed amount rising from $3718.63 to $6110.52. 

It makes sense that Australians are doing so. Motor vehicles are purchases on the higher end of the scale in terms of price, yet they’re also a daily necessity. And while car loans are always available to help Australians finance their vehicle purchases, it’s useful to have something to draw on for capital to pay for part, or even all, of the car. 

Go on a holiday

We all need a little bit of a break sometimes to recharge our batteries. There’s a reason why paid holiday leave is mandated by law — it’s a necessary part of the way work functions. 

Of course, getting together the necessary funding to pay for that holiday is another matter, particularly if it happens to be an expensive overseas one. And with Roy Morgan reporting that Australians passion for travelling to the US has increased over the last few years, it seems that’s exactly what Australians’ holidays are turning into. 

Invest in another property

One of the fantastic things about buying property is that it can turn into a perpetually self-reinforcing cycle — only in a positive way. 

When you purchase a property, it automatically becomes an investment as it begins to steadily accrue value. Then, when you’ve paid off enough of the mortgage and you decide you want to buy a new property purely in order to invest, you can use the resulting equity as a deposit on this new piece of real estate. Eventually, that property will also have built up a significant amount of capital too!

Invest in general

Of course, your equity’s investment potential isn’t solely limited to property. You can use it build an investment portfolio using a variety of different asset classes, from managed funds to shares. 

Not all of these types of investments require a lot of capital. Managed funds, for instance, can be bought into with as little as $1,000. Still the more initial capital you have to put in, the more you stand to get out of your investment — not to mention that you won’t be closed out of more expensive purchases. 

Renovate your home

This is the classic option — expanding or making an addition to your home is one of the most typical uses equity gets put toward by homeowners. Whether you want to add a second bathroom, create a world-class outdoor patio or maybe even add a granny flat for an extra source of cashflow, your home equity is a fantastic way to finance this. 

What will you use your capital gains for?

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Learn more about home loans

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.